Tuesday, August 1, 2017

Established Covered Calls Position in Delta Air Lines Inc.

Today, a covered calls position was established in Delta Air Lines Inc. (ticker symbol DAL) with an August 18, 2017 expiration.  Given the Covered Calls Advisor's current Neutral overall market outlook, an in-the-money covered calls position was established with the strike price of $49.00 slightly below the stock purchase price of $49.97. 

There is potential for a +1.5% absolute return in 18 days (equivalent to a +30.2% annualized return-on-investment).   This potential result substantially exceeds the Covered Calls Advisor's desired threshold of >20% annualized return-on-investment and also demonstrates that despite the historically low current value of the volatility index (VIX), good potential returns are available in some carefully selected stocks.  Although a dividend will not be declared for a few days, it is likely that a dividend at least equal to that of prior quarters of $.2025 is expected to go ex-dividend on about August 15th; so this dividend is included in the potential return-on-investment result detailed below.

Delta Air Lines Inc. (DAL) -- New Covered Calls Position
The transactions were as follows:
08/01/2017  Bought 500 Delta Air Lines Inc. shares @ $49.97
08/01/2017 Sold 5 DAL Aug 18, 2017 $49.00 Call options @ $1.50
Note: this was a simultaneous buy/write transaction.
08/15/2017 $.2025 ex-dividend

A possible overall performance result (including commissions) would be as follows:
Cost Basis Purchase of 500 shares DAL: $24,243.30
= ($49.97 -$1.50)*500 + $8.30 commissions

Net Profit:
(a) Options Income: +$750.00
= ($1.50*500 shares)
(b) Dividend Income: +$101.25
= $.2025 per share x 500 shares
(c) Capital Appreciation (If DAL is above $49.00 strike price at Aug 18th expiration): -$489.95
= ($49.00-$49.97)*500 shares - $4.95 commissions

Total Net Profit (If DAL is above $49.00 strike price at Aug 18, 2017 options expiration): +$361.30
= (+$750.00 options income +$101.25 dividends -$489.95 capital appreciation)

Absolute Return: +1.5%
= +$361.30/$24,243.30
Annualized Return: +30.2%
= (+$361.30/$10,829.95)*(365/18 days)

The downside 'breakeven price' at expiration is at $48.2675 ($49.97 - $1.50 -$.2025), which is 3.4% below the current market price of $49.97. 

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Aug 18th, 2017 options expiration) for this Delta Air Lines covered calls position is 66.9%, so the expected value annualized ROI of this investment (if held until expiration) is +20.2% (+30.2% * 66.9%), a very attractive result for this in-the-money covered calls position.

The 'crossover price' at expiration is $51.2675 ($49.97 + $1.50 -$.2025).  This is the price above which it would have been more profitable to simply buy-and-hold Delta Air Lines stock until August 18th (the August monthly options expiration date) rather than establishing this covered calls position.

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